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SAN FRANCISCO--(BUSINESS WIRE)--Investors may anticipate a new phase of growth in China as a result of a comprehensive reform plan designed to restructure the country by 2020, according to a whitepaper published by Charles Schwab this week. The whitepaper, titled “Why New Reforms Make Chinese Stocks Attractive,” examines the potential for the Chinese government’s reform plans to create both higher quality and more sustainable growth in the country, reducing some uncertainty for investors. The main driver for optimism in China, according to Schwab, is the potential positive impact the reforms could have on both the financial sector and consumer spending.
The whitepaper is published as a Q&A with Michelle Gibley, Director of International Research with Schwab Center for Financial Research, a division of Charles Schwab & Co., Inc. Schwab Center for Financial Research provides investors and independent advisors with Schwab’s point of view on a wide range of market, economic, investing, and financial planning insights and strategies.
According to Gibley, “China could be a ray of light amid the current emerging market turmoil. Over the long term, we see potential for Chinese stocks to outperform stocks in other emerging markets as China’s economic reforms begin to take hold.”
Key points in the whitepaper include:
- The next phase of growth in China might be characterized by slower, yet higher quality and more sustainable growth, even if only a portion of the reforms are actually implemented.
- The impact of China’s reforms on the financial sector could be significant. Reforms could open up new business opportunities for banks and improve the health of local government loans.
- Consumer spending could also see a boost from reforms to rural land rights, the household registration system and modification of China’s one-child policy, which may result in putting more money in the hands of consumers, increasing mobility of the labor force and potentially lifting consumption, respectively.
- Chinese stock valuations could rise as a result of higher quality growth amid negative investor sentiment toward emerging markets, creating an opportunity for risk-tolerant equity investors to take advantage of buying opportunities.
- There could be significant risks in China in the near-term, including increased volatility and uncertainty about the pace of growth and reform momentum as China’s policy makers balance the reforms with economic stability.
The whitepaper notes that investors may consider keeping emerging market equity exposure equal to their long-term strategic allocation, while overweighting China within the emerging market equity allocation with a focus on mutual funds and exchange-traded funds (ETFs) that invest in large-cap Chinese stocks.
“We see potential for risk-tolerant investors to ride out what could be significant volatility over the short term in China in order to take advantage of buying opportunities,” Gibley noted in the whitepaper.
According to Schwab Center for Financial Research, the key economic reforms in China that investors should watch are:
- Reforms to rural land rights which will allow farmers to transfer and leverage land as collateral,
- Changes to household registration that could extend access to public services such as health care and primary education to millions of migrants,
- Loosening of the one-child policy which could increase consumer spending and improve sentiment,
- Fiscal reform at the local government level designed to create better transparency and improve the financial health of local governments,
- State-owned enterprises shifting to a more market-based environment focused on efficiency and return on investment while the government seeks to avoid job losses, and
- A series of reforms designed to make various aspects of the financial system more market-based.
The full whitepaper, part of Schwab’s Investing Ideas series, is available here.
Schwab Investing Ideas offer thoughtful analyses of key market trends and investing opportunities for investors. More information, including other recently published insights, can be found on Schwab’s Investing Ideas page.
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Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.